Thursday, June 10, 2010

More on hedge funds and their role in the crisis

Hedge funds, which are some of the world's most "offshore" organisations, make a lot of noise about how they had nothing to do with the latest financial and economic crisis. There is a very strong article in the Financial Times, with a great section on how they shifted risks in very dangerous ways.

"A number of cases have come to light suggesting that this was going on. The Goldman case is all about “adverse selection” – putting risky assets into CDOs. This was not unique. As the mortgage market weakened, hedge funds eagerly sponsored CDOs to place negative bets – often seeking to push the most toxic debt they could into the structures."

It wasn't only Wall Street: the Swiss bank UBS sold a product called Vertical 2007-1, which UBS staff referred to in internal e-mails as “vomit” and “crap”And the piece goes on to explain how wool was pulled over people's eyes, in a particularly telling quote:

“IKB had an army of PhD types to look at CDO deals and analyse them,” says one CDO investor. “But Wall Street knew that they didn’t get it. When you saw them turn up at conferences there was always a pack of bankers following them.”

For more on IKB, see Jim Stewart's piece in this edition of Tax Justice Focus last year, and the role that offshore played in the latest mess. Read about the role that offshore and tax breaks played here, and read more on the general subject of links between offshore and the financial crisis here.


Anonymous Anonymous said...

Neither this post nor the FT article lined to therein really does anything to show that hedge funds played a prominent role in creating the crisis, as suggestzed by the title of the post. Yes, hedge funds wanted to short the mortgage market, and yes, they may have gotten favourable treatment from banks, but neither of those statements can conceivably be held as major arguments against hedge funds and their supposed role in causing the crisis.

11:26 am  
Anonymous TJN said...

Actually, it does. The hedge funds merely pushed this stuff into where it seemed they weren't the most obvious culprits. Their role remained and remains fundamental.

12:47 am  

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